Payment Terms
Summary Definition: The mutually agreed-upon requirements outlining how and when the buyer must pay the seller for goods and services.
What are Payment Terms?
Payment terms are the agreed-upon conditions outlining when and how a buyer will pay a seller for a product or service. Clear payment terms help both parties align on expectations, reduce confusion, and mitigate disputes over payment timelines.
As such, they’re a foundational part of any business agreement and usually specified in contracts, purchase orders, or invoices. It’s, therefore, paramount for business owners and procurement professionals to have a conceptual and functional understanding of how payment terms work and how procurement service provider platforms can optimize their use.
Key Takeaways
- Payment terms define when and how buyers pay sellers, serving as essential components of contracts, invoices, and business agreements.
- Choosing and managing the right invoice payment terms can help businesses optimize liquidity, improve vendor relationships, and take advantage of early payment incentives.
- Implementing best practices, such as timely revenue recognition and accurate tracking of receivables and payables, ensures alignment with agreed payment terms and supports better financial visibility.
Other Payment Terms Impacts
Payment terms not only influence business operations (e.g., cash flow, financial reporting, budget forecasting, etc.) but also directly impact the organization’s financial health. A payment’s timing, as set by its terms, impacts an organization’s working capital, liquidity, and ability to plan for future growth.
If payment terms are too generous or inconsistent, businesses may experience delayed cash inflows, strained resources, and increased reliance on short-term financing. Conversely, aggressive payment terms might harm vendor relationships or disqualify businesses from early payment incentives.
Thus, organizations sometimes partner with procurement service providers that can review contract payment terms to help:
- Optimize cash flow by aligning payment due dates with revenue cycles
- Strengthen supplier communication with clear, predictable terminology
- Improve contract negotiations based on past performance and insights
- Minimize human errors from manual invoice recording or matching
What are the Different Payment Terms?
Payment term use varies based on industry standards, transaction type, and negotiating power. Regardless, some standard and specialized terms include:
| Term Type | Payment Term | Term Meaning |
| Standard | Net 30 | Full payment is due within 30 days of the invoice date. |
| Net 60 | Full payment is due within 60 days of the invoice date. | |
| Net 90 | Full payment is due within 90 days of the invoice date. | |
| 2/10 Net 30 | Full payment is due within 30 days of the invoice date, but the buyer is entitled to a 2% discount if full payment is made within 10 days of the invoice date. | |
| Cash on Delivery (COD) | Full payment is due in cash at the time of delivery. | |
| Specialized/ Customizable | On Receipt | Full payment is due immediately upon receiving the invoice. |
| Progress | Payments may be made at certain stages of a project. | |
| Retainers | Payments are made before the delivery of goods or services. | |
| Net End of Month (EOM) | Payment is due within a certain number of days after the end of the month in which the invoice was issued. |
While some terms are more common and others more precise, they all carry potential benefits and risks depending on each party’s cash position, leverage, and need.
Payment Terms Example
Business A receives a $1,000 invoice dated January 1 with Net 30 payment terms. This means it has until January 31 to pay the seller the total amount. If Business A schedules its payment for January 31, it maintains liquidity for most of the month, thus supporting a stable cash flow.
Conversely, if the invoice offers 2/10 Net 30 terms, the business could pay the balance by January 11 and save $20. Despite sounding insignificant, if the other two dozen invoices Business A received that month made the same offer, the aggregate savings would grow significantly. However, trying to pay all of the invoices back within 10 days will severely affect Business A’s liquidity.
To help balance the offered savings with its immediate cash flow, Business A could partner with a spend management service provider that can organize and triage the invoices by date, amount, terms, etc.
Payment Terms Best Practices
Managing payment term use can be complicated depending on the nature of an agreement and the existing relationship between the involved parties. Organizations should, therefore, consider a few best practices to avoid miscommunications.
- Recognize Revenue at the Right Moment: Record revenue once the buyer has taken ownership of the goods or services, and there is a clear and reasonable expectation that payment will be received under the agreed-upon payment terms.
- Match Expenses to Receipt of Goods or Services: Log expenses as soon as goods or services are delivered, regardless of when the invoice is paid. This ensures financial records accurately reflect the timing of business activities.
- Track Outstanding Invoices as Accounts Receivable: Maintain clear records of unpaid customer invoices by posting the full amount as accounts receivable. This supports visibility into incoming cash flows and aids in monitoring payment term compliance.
- Record Outstanding Supplier Obligations as Accounts Payable: Post the amount owed to vendors or suppliers as accounts payable once an invoice is received, even if payment is not immediately due. Doing so ensures obligations are tracked and payments align with established invoice payment terms.
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